Mr Tan, the owner of a $22 million building construction business, is worried. He has just been informed by the auditors that there was a sum of $1.4 million of funds that were not fully accounted for and possibly lost over the past three years. Therefore, he contacted your firm that specialises in internal controls and corporate fraud prevention to investigate and provide him with a detailed analysis of the present situation. Your team has just completed the review of the purchasing processes and has documented the following:

The Purchasing Department is headed by the Purchasing Manager who reports to the General Manager. All purchases have to be authorised by the Purchasing Manager first, then the General Manager, before purchases can be issued to the suppliers. However, with the booming construction business during the past few years, the General Managers did not have the time to approve all the manual purchase requisitions; so he gave verbal instructions that only purchases in excess of $20,000 need to be approved by him.

Due to the lack of an integrated purchasing and accounts payable systems, the purchases are raised manually and then submitted to the finance department for payment. The finance department will pay based on the submitted documents and approval for payment. As long as they see the Purchasing Manager's signature, the payment will be made. Due to the nature of the purchases of building materials, the finance department does not check if any supplier invoices is made in error, e.g. double-payment, because of the technical terms and products on the invoices. Supplier payments are usually made by company cheques. However, for smaller purchases, payment by cash or personal credit card was also accepted. The Purchasing Manager will submit these employee claims to finance with the supporting documents for reimbursement accordingly. There are a few occasions of the Purchasing Manager requesting for cash advance from the finance department, because of "urgent" purchase orders that need to be fulfilled. However, due to the lack of communications and follow-up, the finance department did not check if the purchases were genuine and relied on the documents submitted by the Manager.

The company has a list of approved suppliers, but this list was not updated for almost 3 years. There are suppliers not found on this list that the company buys product from. In addition, due to the business nature of the construction industry, there are often multiple suppliers for similar products and the purchaser will need to source for alternative suppliers if the approved suppliers were not able to fulfil the orders. The Purchasing Manager will decide if the new supplier can be used, and no prior approval for higher management is required.

The Purchasing Manager is presently uncontactable and out of town since last week.

Required:

(i)Based on the information given above, identify four (4) areas of internal control weakness, the associated threats and appropriate solutions to be recommended to Mr Tan.

(ii)Mr Tan intends to implement an integrated ERP system with a purchasing module. Identify and describe with relevant examples two (2) types of General IT controls and one (1) type of Application Control that should be considered.